Not So Fast: Southern District of New York Holds Federal Law Pre-Empts State Sexual Harassment Arbitration Law

As we reported on June 21, New York blew the lid off 30 years of sexual harassment and discrimination law by passing legislation that, among other things, bars mandatory arbitration of all claims of discrimination. That earthquake was followed by a substantial aftershock: according to a federal court, that provision of the state law doesn’t square with federal law, which specifically permits arbitration of these claims.

This latest monkey-wrench was thrown into the gears just last week by federal district court Judge Denise Cote when she held that New York’s arbitration law prohibiting arbitration of sexual harassment claims (effective as of July 2018 and reported on by this blog last year) is preempted by the Federal Arbitration Act (“FAA”), and is therefore invalid. This is the first case deciding the merits of this arbitration exclusion. And although Judge Cote didn’t formally rule on the more general, brand-new bar on arbitration of all discrimination claims (harassment or not), she observed in a footnote that the more general bar suffers from the same problem and is probably preempted by federal law, too.

This decision will likely result in a failure-to-launch of the arbitration prohibitions in this latest round of legislation. But for now, here’s the unsettling message for employers navigating the ever-shifting landscape of discrimination law obligations: the new provisions of New York law barring mandatory arbitration of all employment discrimination claims will be struck down, but for the time being, you can’t count on it.

The Facts

In Latif v. Morgan Stanley, et al., the plaintiff alleged that he was subject to discrimination, a hostile work environment, and retaliation, all in violation of federal, state, and city law. Specifically, Mr. Latif alleged that he was the target of inappropriate comments regarding his sexual orientation, inappropriate touching, and offensive comments about his religion. Mr. Latif also alleges he reported these events to human resources, and was terminated shortly thereafter.

As part of his onboarding documentation at hire, Mr. Latif executed a Morgan Stanley Offer Letter. The Offer Letter incorporated Morgan Stanley’s CARE Arbitration Program Arbitration Agreement. This arbitration agreement set forth that any covered claim” between Mr. Latif and Morgan Stanley would be resolved by binding arbitration. Covered claims” included statutory discrimination, harassment and retaliation claims.” The agreement was to be construed in accordance with the FAA.

The Holding

Morgan Stanley moved to compel arbitration of all Mr. Latif’s claims. Mr. Latif did not dispute that his other claims were subject to arbitration, but specifically argued that the sexual harassment claim could not be sent to arbitration due to the New York law prohibiting arbitration of these claims.

To the contrary, Judge Cote found that Mr. Latif’s sexual harassment claims were subject to mandatory arbitration since New York’s law was inconsistent with the FAA. She found that the FAA is clear: when a state law prohibits the arbitration of a specific type of claim (in this case, a sexual harassment claim), then that state law is displaced by the FAA.” In other words, the FAA’s strong presumption of favoring the enforcement of arbitration agreements overrides New York’s attempt to prohibit arbitration of sexual harassment claims.

Judge Cote went even further to suggest that New York’s recent legislative amendment of prohibiting mandatory arbitration for all discrimination claims would likely meet the same fate.

What This Means for Employers

No one can blame employers who want to rush to their arbitration agreement template and reinsert sexual harassment claims as a covered claim. However, since the Latif decision is only a trial court decision, and there is likely to be an appeal to the Second Circuit, employers should exercise caution.

For those employers that wish to revise their arbitration agreements, they should be prepared to engage in a similar court battle over the validity of arbitrating sexual harassment claims. Depending the whether this battle will be in state or federal court, and depending on the judge who decides the matter, employers may not see the same result as Latif. In that case, the employer will then have to continue onto litigation in court.

For those employers who don’t wish to revise their arbitration agreements, they should closely watch the legal news regarding this topic to see if additional trial courts, or better yet, an appellate court, reinforce Judge Cote’s decision in Latif. This may take a few months to a few years.